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A long line of panicked Northern Rock customers queuing to withdraw cash in September 2007 became one of the most memorable images of the financial crisis in the UK. A decade on from the run on Northern Rock, the first on a British lender since 1866, how dramatically has the banking landscape changed. Northern Rock had a loan to deposit ratio of 322%, well ahead of competitors in 2007-- and almost two times HBOS, which later collapsed itself. HSBC, with its lending ratio below 100%, was relatively safe.
Banks are significantly less dependent on short-term wholesale market finance now. Before the crisis unfolded, levels peaked at more than a quarter of total funding, which has come down to just 10% now. Northern Rock, by comparison, had short-term wholesale funding liabilities of about 60%-- more than twice the UK market average.
Banks lent out high loan to value mortgages before the financial crisis, with Northern Rock offering a 125% mortgage that included an unsecured loan. The average loan to value of a mortgage was 90% in 2007, but it's since dropped to 78% following stricter lending criteria imposed by regulators. Unsecured consumer credit has soared since 2010, with rates of growth returning to pre-crisis levels of around 10%. Although the annual growth rate softened to 9.8% in July, the lowest since April 2016, it has risen for the past 56 consecutive months.
UK banks have raised more than $130 billion pounds in additional capital since 2007. As a result, bank's balance sheets have strengthened with the average core tier-one ratio, measure of capital to risk weighted assets, increasing threefold to 14.3% over the period. The run on Northern Rock exposed the need for a larger compensation scheme to protect depositors if a bank were to fail. The limit on the financial services compensation scheme was raised from 31,700 pounds after the run to 35,000 pounds, and now stands at 85,000 pounds.
While on many metrics banks look safer now, some of the risky practises employed by Northern Rock and other lenders have reemerged in different guises, especially in UK banks' exposure to consumer credit.
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